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China's Internet economy is developing rapidly with the help of government funding and a protected domestic market. European governments have to rethink their digital policies to be prepared for the Chinese competition.

A woman places an order on a touch screen at a pick-up station of Chinese car-hailing app Didi in Shanghai

Whoever travels to Beijing nowadays will quickly notice how the digital revolution has become a part of everyday life in China: Taxis rarely stop when you flag them, for example, because they are already reserved. Most Chinese book the drivers directly through the "Didi" smartphone app. At restaurants and noodle stands, they prefer to pay electronically rather than use cash.

The digital transformation of business and society is progressing faster in China than in most countries. In urban centers, more and more Chinese are using digital technology applications. The 50 million registered users of "Didi" order nearly 1.5 billion trips per year. By contrast, the most widely used app in Europe, "MyTaxi," has only three million users in seven countries. Online retailers now reach a half billion customers in another example of how quickly digitalization has changed the structures and transactions in China's economy.

The Chinese government has deliberately fuelled this rapid development, pouring a lot of money into tech start-ups. Many digital markets in China are only partially regulated at this point. As a result, companies can quickly test their products directly in the marketplace – often in legal grey areas. In the West, data protection often serves as a kind of brake, slowing down daring digital business ideas. By contrast, the government and companies in China don’t consider data protection as overly important, and it is generally not a welcome topic of discussion.

Foreign competitors are shut out

Another competitive advantage for Chinese Internet companies is that major foreign competitors have no market access: Twitter, Facebook and Google are blocked in China. The Chinese government has prevented top American IT investors from buying up Chinese competitors in their early stages. Without this governmental protection for domestic "infant industries," the tremendous growth experienced by many Chinese tech companies would not have been possible.

Under these favorable conditions, these companies were able to develop business models that have the potential to shape the global digital transformation. This is particularly true of the change to a cashless society. 65 to 80 per cent of smartphone owners in China's major cities use the pay apps "Alipay" and "WeChat Pay." In 2016, transactions carried out via electronic payment platforms in China were worth nearly nine trillion USD. In order not to lose control of the payment system, the Chinese central bank recently intervened: from July 2018 onwards, all online and mobile payments must be carried out via a platform controlled by the state.

At least for now, most of the digital transformation of China’s economy and society takes past in the country’s vast domestic market. Chinese tech companies are creating digital ecosystems that break down traditional industry boundaries – even more so than the American competition like Apple and Google.

Life without apps becomes unthinkable

In their new book, economists Mark Greeven and Wei Wei show how the Tencent Group became one of the world's most valuable listed technology companies. Its multi-functional "WeChat" application has nearly one billion users. Tencent has developed dozens of applications for a variety of business areas to tie users to its own ecosystem. This includes six of the ten most popular Chinese smartphone games, a video portal as well as e-bike, health and cloud applications. The same is true of Tencent's major competitor Alibaba, which started as a Chinese counterpart of the Internet auction house Ebay, but has now outgrown western models.

In this "platform revolution," the Chinese Internet companies want to make sure that a life without apps is unthinkable to the Chinese. The new digital communications and transaction platforms can overrun old-fashioned businesses within a matter of years, or even months. Traditional companies are faced with the choice to build their own digital ecosystems as quickly as possible, or to join these new platforms.

China’s tech giants focus on the Chinese market for now, but they have taken their first steps onto the global stage: "Alipay" is expanding in Southeast Asia, India and Africa with a high capital investment, despite many obstacles and setbacks. In Europe, the company is still targeting Chinese tourists and Chinese living abroad as customers. However, in ten years, according to company targets, two billion people around the world will use "Alipay" – 60 per cent of whom outside of China.

Innovation from below won’t be enough

So far, most of the innovative power of Chinese companies has been applied to inventing and implementing new digital business models. However, China's government and major companies also want to catch up on the fundamentals – that is, they aim to create digital innovation leaders. For this reason, the government, companies and universities invest heavily in research and training, for example, in the field of Artificial Intelligence and Big Data.

European governments will have to fundamentally rethink their digital policies in order to be able to counter the onslaught of Chinese companies and innovations. Relying only on the power of company- and market-driven "innovation from below" will not be enough. Digital transformation requires new infrastructures, targeted support measures, and educational opportunities, as well as constantly adapted market regulations – which must be put in place by governments and parliaments, not by companies.

A German version of this article was first published in Frankfurter Allgemeine Sonntagszeitung on September 3, 2017.